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Financial glossary

F

Floor

An interest rate floor is a derivative contract in which the buyer pays a fee (premium) to receive payments at the end of each defined period when the interest rate used as a reference is below a pre-agreed level (strike price). For instance, an agreement to receive a payment every six months for the next three years when the six month EURIBOR rate is below 1% is a three year floor strike of 1% on 6 month EURIBOR.

Forward

A forward is generally an OTC contract between two counterparties to buy or sell an asset (which can be for instance a foreign currency, a government bond, a stock) at a future date and at a predetermined price. A forward contract is traditionally opposed to a spot transaction.

Forward rate agreement

A forward rate agreement (FRA) is generally an OTC contract between two counterparties agreeing on an interest rate to be applied to a forward loan. The FRA receiver thus accepts the contract, at a pre-determined interest rate, to lend money to the FRA payer at a future date. Generally, no loan will be extended, instead the FRA will be cash-settled at the forward date.

Future

A future is a contract to buy or sell an underlying (such as stock index, commodities, government bonds) at a specified date and at a pre-defined price. Unlike forwards which are generally OTCs, futures can be standardised contracts traded on exchanges that require margin calls.

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